GM’s investors and bondholders have taken their lumps. The value of their investments have plummeted and they’ve been blamed for enabling GM’s mismanagement. Hedge fund managers and institutional investors are not the most popular people in the wake of the financial meltdown so it’s easy to forget that many investors are not Wall Street wheeler dealers, but regular folks with investments.

Patricia St. Pierre is a nice lady. She and her husband Cliff worked hard, raised a family, got their kids through college and retired on their investments. They live on Grosse Ile, a comfortable island suburb downriver of Detroit. She’s 70 now and she’s worried about having to go back to work because their life savings may be wiped out in a GM bankruptcy.

Mrs. St. Pierre and her husband have what she calls a “large amount” invested in unsecured GM bonds. The St. Pierres attended a meeting at Warren’s town hall, across the street from GM’s Tech Center with other individual bond holders on Thursday as the President was announcing the bankruptcy of crosstown rival Chrysler. When I asked her how she came to own the bonds, she said that they had moved to bonds during a downturn in the stock market with their mutual funds. They wanted to try “something that was safe”.

They initially did well with Ford bonds but moved to GM debt three years ago when Ford seemed to be at greater risk than GM. As their broker told them, “you don’t think they’ll ever be out of business.” That same reason is why they haven’t sold before now. They also didn’t know at first that the debt was unsecured. Then the bottom fell out last fall. “Everything turned on a dime.”

Though neither has worked for the company in years, the St. Pierres have ties to GM. Her father is a GM retiree and she worked for GM right out of high school for seven years. Cliff St. Pierre graduated from the General Motors Institute. LIke GMI grads back in the day he worked as an intern at GM and then started his career there.

The St. Pierres live off the income from their investments and Patricia acknowledged that they’ve earned interest since owning the bonds, but they face losing all the principal since the bonds are unsecured. GM has offered debt holders 225 shares of stock in a reorganized GM in exchange for $1000 of the $27 billion in debt GM owes, plus whatever accrued interest the bonds have at this point. If they don’t accept the deal, GM will declare bankruptcy and they’ll get nothing.

The stock offered to bondholders will represent 10% of GM’s equity. Stockholders, punished for enabling a feckless board of directors, will own 1 percent of GM stock. The government will own 50 percent of GM, and the UAW’s VEBA will own the remaining 39 percent.

One thing that troubles the St. Pierres the most is that they are being left completely out of the loop and not informed by either GM or the government. While the large bondholders are negotiating with and in constant contact with GM and the Presidential Task Force on Automobiles (PTFOA), the St. Pierres haven’t heard a thing except for the most recent prospectus from GM.

There is nobody in the process representing their interests. They’ve contacted Senators Stabenow and Levin to complain but their elected officials haven’t been very reassuring. They feel pretty helpless. Their broker doesn’t really know any more than they do. The St. Pierres aren’t destitute, but you could hear the worry in her voice. “I’m glad my kids aren’t about to graduate (high school) and go to college.”

While it can be argued that they took a risk and lost their bet, the government cutting in line ahead of other prior creditors creates a huge dilemma for investors, investors that may be you, your neighbors and your family members. As Cliff St. Pierre said, “who will want to buy bonds?” Who will want to invest if the government is going to step in and declare your investment virtually worthless?

Some say that GM’s stakeholders, management, the UAW, shareholders and bondholders, all deserve blame for the company’s decline, but the bondholders and stockholders, while perhaps giving management too little oversight, played by well defined rules, the rules and laws we’ve used to become the wealthiest society in the planet’s history. Now the President is rewriting the rules.

When I asked her who she thought would protect her interests more, the administration in Washington or a bankruptcy judge, Patricia laughed ruefully and said the bankruptcy judge. She’s not happy about the government owning GM. GM’s bondholders, after all, do have a bigger investment in the company than the government. “It’s not a good situation,” she said.

Recommended

71 Comments on “General Motors Death Watch 250: Interview with a GM Bondholder...”

Bondholders have no direct way to give oversight to management. They don’t have votes on issues or management members like shareholders (of stock). The only conceivable way a bondholder could give a message to management would be to sell (or not buy) the bond.

But the main message of the article is correct. The news stories are always framed that Chase, Bank of America, or other large (rich) organizations are demanding payment. Well those organizations are usually acting for many ordinary people through their mutual fund investments, or pension investment. The breaking of the usual (lawful) arrangement that bondholders have priority on monies of a bankrupt company is serious and it has consequences for *ordinary people*.

Anytime you buy individual stocks or bonds you are taking the risk of loosing 100% of your investment.

“… they had moved to bonds during a downturn in the stock market with their mutual funds …”

Diversification is the first commandant of good investing. They were probably attracted to the GM bonds because they showed relatively high yields. But, the only way you get a higher yielding bond is to take more risk. Granted, their broker probably gave bad advice. People forget that brokers are nothing but salespeople.

Also, why aren’t we hearing the many more similar stories about those who bought GM stock and have lost nearly everything? Why is the individual bond buyer noteworthy while the individual stockholder is ignored?

Joe Horner, I was just about to say the same thing. While I feel sorry for the small investers, you need to use common sense when investing. I pulled most of my money out of stock mutual funds last fall and invested in bond mutual funds. I would NEVER put all of my money into a single bond or a single stock. Doesn’t anyone learn from the past?

@moedaman
You have done the prudent thing and gotten somewhat diversified in a bond mutual fund.

But the president is breaking precedent and changing the law about bankruptcy and bondholders. The law states that bondholders are secured. All prior financial precedent has followed that.
What keeps the president from making any bondholders not have secured claim on any company? That would make your diversification in bonds potentially not effective anymore – and worth less. What other financial instrument are you going to move to? And will the president *adjust* that?
What other financial arrangement is the president going to unilaterally break (without lawyers, judges)? There is this thing called due process.
I suspect you are going to see some due process in the Chrysler bankruptcy. The judge will make some different arrangements than the president has proposed.

@John Horner
The reason we’re not hearing about stockholders is because they have different expectations. They don’t have a secure hold on a bankrupt company like bondholders. Everyone in the financial world knows that stockholders of a bankrupt company are kaput, zero. There is and never has been any other expectation. Bondholders have a greater expectation of security. Nothing is perfectly secure but bondholders are ahead of stockholders in bankruptcy.

Same thing happened here with a steel making company called Stelco. Through some kind of “restructering” the company was allowed to exist but the shareholders and bondholders were given squat. Bre-X………another disaster with lots of investors (speculators?) losing everything.
If you trust in others to do what’s best with YOUR money then this kind of thing can happen.
If you trust the fox to guard the henhouse dont be surprised when the hens disappear along with the eggs!

Here’s another story.A young fell’a dropped out of high school[dumb move].GM offered him a job,excellant wages and benifits,and when your old and can’t work anymore,a nice pension for the rest of your life.

The young fell’a married his girl friend had two lovely daughter’s.The guy paid his bills put both girls through university.He paid his taxes and donated to charity.In the meantime his young bride upgraded her education, worked her pretty butt off.She managed to secure a lower mid management job in one of Canada’s largest banks.

The not so young couple,after paying for a couple wedddings said lets invest in a nice house in a upscale area.They traveled bought nice clothes.Hey! the not so young fell’a could even afford a fun car.Its parked in his garage where he can wax a polish it.

So after 36 years at GM he retires with his promised pension.Oh!..did we say promised?Well it seems that things are not what you might of thought.You see grandpa we pissed away your pension plan.

Robert… I truly feel for the St Pierre’s but thier’s is just another story.Colateral damage if you will.If it wasn’t for my wifes job/pension and the equity in my home we would be fu—d.

That isn’t accurate. Nobody’s lien position has changed, they’re in the same place that they’ve always been.

Thanks to the government, her bonds are worth more today than they would have been had Uncle Sam not rescued them. Leave it to the people of Michigan to look a gift horse in the mouth.

Blame the broker for suckering an old lady into a bad idea. People of her age have no business putting essential capital in the markets, because they stand little chance of earning back losses. That’s Financial Planning 101.

Never invest in a business if you don’t understand it, particularly if you need the money. That’s true, even if you used to work for the company.

Anytime you buy individual stocks or bonds you are taking the risk of loosing 100% of your investment.

———————————————-

It’s one thing to lose a bet, it’s another that the government confiscate your private property.

Suppose GM is worth $3 now and has $10 in debt. The first person (first as in first in debt priority) who lent GM $2 is supposed to be able to fully recover that $2 in a society governed by law. The second person who lent GM $2 is supposed to get $1 back. The rest, no luck.

But now the government is trying to confiscate part of that $2 and $1 entitled to the first two creditors.

Suppose GM is worth $3 now and has $10 in debt. The first person (first as in first in debt priority) who lent GM $2 is supposed to be able to fully recover that $2 in a society governed by law. The second person who lent GM $2 is supposed to get $1 back. The rest, no luck.

But now the government is trying to confiscate part of that $2 and $1 entitled to the first two creditors.

That is not at all what is happening. Seriously. I don’t know where got that metaphor from, but it has nothing to do with this situation.

They’re upset because neither GM nor the PTFOA is keeping them informed. They’re also not happy with how the government is acting in regard to rewriting long standing rules about debt and standing. I think they’re justified in thinking that a bankruptcy judge will adhere more closely to the rule of laws than the current administration in Washington.

More human wreckage. Not as severe as those two brothers who owned a domestic dealership. One was found dead of a heart attack near their sales lot where he torched cars and the other was discovered a suicide in his car about a month later.

It’s easy to be glib and blame the stockholders or bondholders but they’re real people facing a real crisis.

Ohhh this pisses me off. Blaming Obama and Washington. These idiots all seem to forget that GM ASKED FOR THIS.

The day that Wagonner went to Washington to beg for bucks was the day that the stockholders should have fired him and the BoD. What the hell did they think was going to happen? GM might as well have gone to the Mafia loan sharks. Of course getting “unconventional financing” was going to have strings. And putting a gun to the taxpayers heads and demanding a “loan” is of course going to have severe consequences.

The fact is, Wagonner and the BoD sold the company out from the stockholders. And the stockholders let them do it by doing nothing year and after year as GM was run in to the ground.

Bush may have loaned GM money but it’s Obama who is pulling a Tony Soprano, taking the company over and nationalizing it.

Do we all have that short of a memory… Bush told GM this was going to happen…

When Bush gave I mean lent the money it was with the promise of “Get your house in order by March 31 or you will be liquidated/nationalized/sold off or worse…

When Rick produced yet another BS business plan… Obama gave GM another 30 days to “try again”, while Rick works on his golf game and his tan. If Obama was hell bent on nationalizing GM he would have just called the loans on Jan 21 and taken control then… He would not be giving an extra month here, 30 days there.

The GM BOD, Rick Wagoner, Paulson and GW Bush put GM in this place…(pretty much in that order too) No one else.

The GM *financial situation* wasn’t going to be solved by President Bush – there simply wasn’t any time. I believe President Bush loaned GM the money to stabilize the situation so that President Obama could *solve* it. Whether you like Bush or Obama, Presidents in general are reluctant to make long-standing major agreements near the end of their term. It’s just a respectful thing by the outgoing-President to do for the incoming-President. The incoming-President can then handle the situation the way he wants (within the law).

I prefer that the injections of money by government into these various industries would have been via conventional financial instruments (stocks, bonds). But the government (Obama) has taken the role of *preferred* stockholder/bond holder and ordered not-usual winners and losers.

The UAW were not owner of GM/Chrysler, and should not be given any shares after restructure.

They have an ownership interest in a Good firm. That didn’t cost the owners in the old firm (the Bad firm) anything.

—————————————–

That’s exactly the problem. All UAW owns is some unsecured debt, which should be wiped out in C11.

Why the hell should they own any share of the new good company?

By promising some people stake they don’t deserve, Obama and Co. is short changing real owners of the company their fair share.

Again, in a C11 GM/Chrysler are owned by bond holders and the government proportionally to their investment, and absolutely no one else (stock owners own some, if the companies don’t have to file C11).

This lady is a very dumb investor.
She bought those bonds 3 years ago? When they were already downgraded to junk status?
And she bought a big concentration in a single company that was already making big losses?
And Farago had put GM already on Death Watch?
This lady was expecting a juicy 12% yield 3 years ago without taking a risk?

That was a snide and unnecessary comment. You have no idea of the extent to which Michigan has suffered wrenching losses of jobs in the last decade.

As I said, they’re upset because they’re being kept in the dark. The administration is steamrolling any opposition to its plan to share nationalization of GM & Chrysler with the UAW.

In the case of Chrysler, only the largest institutional investors, the ones who took or were forced to take TARP funds, had direct contact with the PTFOA. The smaller creditors, holding $1 billion of Chrysler’s $6.9B in debt, had to negotiate through the large bondholders.

In the case of the St. Pierres, they have nobody representing their interests.

The bondholders didn’t ask for this. Yes they took risk, but there were contracts signed securing their loans to GM with some kind of tangible assets. One risk they never thought they were taking was that the government was going to change the rules and try to take away their property rights as holders of secured debt.

You’d be in even worse shape had we not tossed you a lifeline last year and then again this year. You complain about the government, even though it has used taxpayer money to prop up your companies and investments that would have already imploded had we not helped you.

I’d appreciate a thank you, but I’m sure that won’t be forthcoming. People who feel entitled don’t tend to feel much gratitude, even when they receive help that they didn’t deserve in the first place.

“Yes they took risk, but there were contracts signed securing their loans to GM with some kind of tangible assets.”

Nonsense. Bank loans to companies are often secured by assets, but bonds are almost never secured by assets. If you are going to make “the law states” arguments, please get your facts right. Please, show me the contract which says GM or Chrysler bonds are secured by certain assets.

In a reorganization, the priority of payments is not as clear cut as some people make it out to be. Trade creditors, for example, get very low priority in a liquidation. However, in a reorganization the trade creditors generally do much better than they would in a liquidation because ongoing good relations with the trade creditors is often a requirement for the business to survive. In a C11 reorg, the priority goal is to successfully reconstitute the company so that it can survive going forward while at the same time not sticking it to the creditors any more than is necessary. What is “fair” in those circumstances is subject to a lot of argument, and how the judge will rule is often a big unknown.

“In the case of Chrysler, only the largest institutional investors, the ones who took or were forced to take TARP funds, had direct contact with the PTFOA. The smaller creditors, holding $1 billion of Chrysler’s $6.9B in debt, had to negotiate through the large bondholders.”

Its incredible. No matter how many rules and regulations the SEC issues to protect uneducated investors (and believe me there are a lot I have the book right here) people still find ways to screw it up.

Bonds are not inherently “safe”. A bond is only as safe as the creditworthiness of the issuer. I guess someone must have led these folks to believe that GM’s bonds were just like high interest rate CDs.

And besides, Obama is still offering them equity for their debt. Unless GM goes Chapter 7, or it ends up going Chapter 11 again (which the government won’t let happen), all they have to do is wait till the stock price reaches $5 a share and they can actually still make money on this whole thing.

Directors of a company are voted on by the stock holders. They serve terms – like 2 years. The terms are staggered so that not all the directors are put up for vote at the same time. So it’s difficult to remove all the directors at the same time by elections.

It may be nearly impossible to replace all the directors at once – it may be against the incorporation rules of the company. The rules were written when the company was formed or incorporated. To modify the rules a vote must be held. If the new rules are approved, then new elections could be held.

A new chairman of the board could request all the directors resign. Directors can probably resign at any time.

In general it is hard to replace the entire board if they don’t want to leave.

If this article was followed up by another that went like this, I might have sympathy. “Here’s Fred Johnson, he’s a tool and Die maker for Chrysler. He works really hard and has a family and he is a good guy…” Then the larger context would be a story about how bankruptcy can screw over lots of people who more often then not do not deserve bad things.

As it is, the story is asking me to feel the enormous pain of people who didn’t get the one cent on the dollar they were entitled to because the government wants to avoid liquidation. It is ridiculous. Thousands of Freds are going to loose their jobs permanently, but apparently they are all deserving of it, since some of then belonged to unions. But a Bondholder takes a 100% loss instead of a maybe 99% one due to government action?! Heavens! I think I’m about to have an attack of the vapors, contemplating such suffering!

If the story here is “big gov’t causes misery through action”, then it is only very slightly more misery then the market would have caused anyway. If the story here is “oh those poor poor pitiful bond holders :( “, then, well, I think I will link to a writer better then me to give additional comment:

Ronnie, thank you for contributing this piece. It is good to be reminded that individual bondholders (sometimes called capitalists) are human beings, and that many are being cast into the vast sea of human wreckage caused by the decline of Detroit.

From an AP article found on Yahoo Finance:
“One individual bondholder said although the exchange offer isn’t as attractive as he hoped, he’s likely to take it.
‘I think this is the best deal we’re going to get,’ said Clifford St. Pierre, of Grosse Ile, Michigan. St. Pierre and his wife have the bulk of their retirement savings, about $200,000, in GM notes.
‘If the restructuring is what they say it’s going to be, I believe [the new GM] will come out of this a viable company,” said St. Pierre, 70. ‘My word to the bondholders is, “Don’t cut your nose off to spite your face. You have to take the deal.”‘

My observations: Based on the above, I’m pretty sure the St. Pierres are unsophisticated investors. They certainly made mistakes, such as failing to diversify. Perhaps they were entranced by the yield; life savings of some $200K won’t earn much if put in CD’s at the local bank. My hunch is they thought they were investing in the GM of their youth: the world’s mightiest corporation. Actually, its shareholder equity went negative three years ago. I would have halted retail issuance of GM’s debt or stock back then.

Maybe a pro-rata share of ten percent of new GM stock is “the best deal [the St. Pierres] are going to get.” Nevertheless, it isn’t what they would have gotten had politicians refrained from deciding who deserves to win or lose, and by how much.

PCH, why should I feel good about accepting a “gift” that was stolen from somebody else?

It is not at all clear to me that Cliff and Patricia are better off that GM has been on welfare since December, rather than having gone into bankruptcy protection earlier. Can you prove that? It doesn’t matter; their creditor claims need to be treated according to the rule of law. I didn’t read that Patricia wanted anything different.

mfgreen40: “How easy or hard is it for the stock holders to fire the board of directors?”

In theory, shareholders can do this at will, at least as the staggered terms expire. In practice, unless an individual holder or a coordinating group (e.g., the Ford family) have sufficient votes, directors are hard to get rid of. Generally, they are chosen by the CEO and/or other insiders, many shares are voted by management due to having proxies, and so the ballots cast by the average person are essentially meaningless.

Neb: what you don’t get is that “Fred Johnson” is getting treated relatively better that what he is entitled to under the law. If Obama ordered you to move to a smaller house because other people are thought more deserving of the space, would you feel ill-treated? Most homeowners would. So as a nation we give people more space by enacting laws, appropriating funds, building public housing, following rules to decide who gets the benefit, etc. The GM and Chrysler deals aren’t like that.
I looked at the “Chavez” article to which you approvingly linked. The piece is objectively Marxist, so there seems little point to further discussion.

The St Pierres were looking to make money, so were Bernie Maddof’s investors. When you invest you are gambling that your investment will grow, if it doesn’t you lose, it’s that simple. The exception to that is if you contributed to a senators campaign or the president’s then you get your money back, isn’t it nice to own your government.

Yes they took risk, but there were contracts signed securing their loans to GM with some kind of tangible assets.

Good thing the site isn’t called “truth about investing” The above could not be further from the truth… None of these bonds were secured with ANY kind of tangible asset. That’s how they were sold and that is how they are recorded on GM’s books… If their broker told them that they were “secured” then he LIED… and he should be SUED. PERIOD.

Objectively Marxist, ha ha ha ha ha. OK, first point: way to utterly ignore everything I said. Second: Marxism does not mean “a bin that I throw every thought that I don’t like”, as you used it. The proper use of the term “Marxism” is to describe a specific political ideology, namely one that sees all the problems of history in terms of a class struggle, and one that sees the solution to these problems by violent revolution of the working classes. Let me know where economist Andrew Leonard advocated any of that. Since I’ve been around your type before, I know what you really mean by Marxism is that Leonard believes in a public good (Marxist!), or Leonard implied that the FREE MARKET doesn’t magically produce the best of all possible outcomes all of the time (super duper Marxist!!). By either definition, GW Bush and his comrade Robert Paulson (y’know, former head of one of the world’s largest investment banks) are “objectively Marxist.”

And, third, it’s a good thing too. Those “Objective Marxists” saved your ass, and everyone that you love from living through another Great Depression:

http://www.youtube.com/watch?v=Sxz6gYIiFHc

I guess you would have chosen the Great Depression 2, instead, since I’m guessing for you living in a libertarian fantasy world is far more important avoiding the world where you have to decide between cat or pigeon for dinner

CamaroKid: “None of these bonds were secured with ANY kind of tangible asset.”

How do you know that? The article doesn’t provide any such details. It IS possible for loans to be secured by specific property as collateral (recall that Ford famously mortgaged the Blue Oval). And GM’s financial statements report “secured” debt. My guess, however, is that the St. Pierres hold some uncollateralized securities (debentures) which GM has issued in large quantities.

Nevertheless, bondholders can have preference (over other creditors) to whatever remains in a bankrupt firm. In GM’s case, they are not even getting a proportionate share. Therefore, the government’s proposal may be rejected, and the mess will wind up in court after all.

She received horrible professional advice and her advisor should have been tossed and moved on 2.5 years ago. In her late 60’s she should have been in bond funds &/or mostly govt bonds.
They were also greedy, I suspect, if they went into this at a very high rate, as mentioned above, expecting safety.

That was a snide and unnecessary comment. You have no idea of the extent to which Michigan has suffered wrenching losses of jobs in the last decade.

WTF? Really?

After that bondholder sob story, I’d have thought the argument was about how the big bad gov screwed over them over in favor of the UAW.

So now it’s the gov who supposed didn’t lay out enough cash to pay everyone else.

Wow, just wow.

–
Trade creditors, for example, get very low priority in a liquidation. However, in a reorganization the trade creditors generally do much better than they would in a liquidation because ongoing good relations with the trade creditors is often a requirement for the business to survive.

Good comments like this and by pch should encourage people to read about how bankruptcies are actually handled in the real world instead of falling for the idiotic political claptrap.

The sequence of events in this case are hardly all that unusual.

–

Nevertheless, it isn’t what they would have gotten had politicians refrained from deciding who deserves to win or lose, and by how much.

Pro tip: to make people who make statements like this look dumb, just ask them what specifically they would’ve changed about the deal and why.

“The GM *financial situation* wasn’t going to be solved by President Bush – there simply wasn’t any time. I believe President Bush loaned GM the money to stabilize the situation so that President Obama could *solve* it.”

Thank you for stating this. I have seen so many mis-characterizations of both Bush AND Obama on this. Obama detractors say it’s all his fault for the way things are heading, Obama defenders say no it was Bush’s fault for giving them loans in the first place. Listen, the normal thing for an outgoing and incoming administrations is to TALK TO EACH OTHER and co-ordinate the hand off of power. That’s what makes our democracy work. Bush did NOTHING in this case that Obama did not approve of, because they discussed it. I don’t blame Bush, and I don’t blame Obama for the loans and the viability deadlines. I’m not an Obama (Soft Drink) supporter. But he did the right thing in trying to throw a life line to GM and Chrysler. As did Bush before him. To have done nothing would have made the current economy seem like a party compared to what it would have been with a GM/Chrysler liquidation.

What is happening NOW in the C11’s, is up for debate. I haven’t made up my mind one way or the other but I recognize that some of Obama’s decisions are troubling and probably precedent setting (as in bad). But I’m not going to make a knee-jerk reaction that everything he is doing is bad.

All of you Bush detractors should be greatful of one thing: The outgoing president acted like a mature adult and co-operated with the new incoming president and administration. Contrast that with the last changeover in which little was exchanged, property stolen, college level pranks were played, and a rash of executive orders were filed at the last minute including some environmental edicts that Bubba was too cowardly to try to do under his own watch, edicts that Bush had to reverse and took heat for from the left wing zealots. Compare and contrast. Bush is an adult. Obama so far appears that he is an adult. Clinton and Gore were just older college frat boys in comparison.

It IS possible for loans to be secured by specific property as collateral

It is, but bonds usually aren’t, and as far as I can tell, GM’s are no exception. Their bonds are unsecured, and they’ve issued some convertibles that could be turned into equity, but GM’s secured debt is most likely owed to banks and other financial institutions. You can look at the specifics of the bond debt in the investor section of the GM website if you care to check.

Chrysler does have some bondholders who hold secured debt. That’s a bit unique, and they’re not in the same boat as are the GM bondholders. If memory serves, the Chrysler bonds are all post-Daimler; I believe all of the old ones were paid off as part of the Cerberus deal, and new ones issued.

It is not at all clear to me that Cliff and Patricia are better off that GM has been on welfare since December, rather than having gone into bankruptcy protection earlier.

It should be clear. If the government hadn’t bailed out GM, it would have already filed bankruptcy.

Without government help, GM would be in no position to survive Chapter 11; there would be no DIP financing from the private markets, and no acceptable business plan to result in reorganization. If Chapter 11 fails, 11 becomes 7 and everything gets sold off.

GM’s assets aren’t worth a damn. Used factories and rotting Cobalts don’t get converted into much cash. Meanwhile, there are other creditors who take priority over bondholders. So they’d be fighting over scraps, and they’d be hashing it out for quite awhile. The only asset that counts in these situations is cash, and GM clearly doesn’t have enough of that.

The people in this story allegedly bought these bonds in 2006. Well, guess what? By then, those bonds were already rated at junk status.

Retirees are not supposed to buy junk bonds with money that they need for living. If those were pushed onto them by a planner, that guy should be sued. If they thought that they were secured, then they should have read the prospectus.

As usual, these financial mistakes are usually produced by a combination of greed, ignorance, naivete and bad timing. The bonds looked cheap, but they were cheap for a reason. I feel badly for them, but they screwed up. That happens sometimes.

Secured bank loans are common, secured bonds are rare. From my reading, it looks like the big banks made billions in secured loans to Cerberus Owned Chrysler and then resold as many of those loans to third parties as they could. The hold out lenders in the recent Chrysler negotiations appear to mostly be funds which bought these loans from JP Morgan, et al. They bought those loans at a discount from face value and did so while speculating just what fraction they would be able to eventually recover.

In many ways those funds are similar to companies which buy patents in hopes of eventually wresting some value from the patents through litigation, as opposed to profiting from patents by actually making and selling the patented items. These are not venture capitalists, they are vulture capitalists. They like to puff and preen about the sanctity of the rule of law, but in reality these guys are legal/finance types who spend their days trying to extract as much wealth from the productive economy for themselves as possible. Curiously enough, these are not the hero protagonists of Ayn Rand’s novels, they are in fact some of the blood suckers against whom Rand’s protagonists inveigh. Her “Atlas” wasn’t a lawyer/banker.

BTW, conflating the individual GM junk bond holders and these vulture fund Chrysler debt holders is one of the mistakes some people are making.

This has been an educational thread. It sounds like Cliff St. Pierre has it right – take the deal. If I understand correctly, he and his wife will get 45000 shares of GM and the sidebar here tells me that’s worth $81450 as of 5/1/09 – unless the dilution drives it lower or it is some other stock class. That’s not a bad return for a company that’s been insolvent for some years. What is the St. Pierre’s loss when you add in the interest paid since they bought the bonds in 2006? For example, three years at 12% would be $72000, added to the assumed current valuation that would be a 25% loss, without adjustment for the taxes on the ‘profit/income’ that amount represents. If they got tax-whacked for 1/3 of the $72k, that still is a 35% loss – which still wouldn’t look too bad to many stock investors over the past two years.
Can anybody more knowledgeable comment on what their actual situation might be?
And of course, their weasel of a financial adviser should be strung up by the short hairs. Realistically, he should be permanently banned from the financial industry. Too many of these useless drones running around anyway.

How do you know that? The article doesn’t provide any such details. It IS possible for loans to be secured by specific property as collateral (recall that Ford famously mortgaged the Blue Oval). And GM’s financial statements report “secured” debt

There are lots of clues in the article (assuming that it is true) that would guarantee that they are unsecured.. Some facts
1) If they were secured… they still are. When Bush gave his loans he did not “bump” any secured bond holder. Even if he did, his liens would be secondary to the primary lien (like a second mortgage on a house) Ma and Pa would still be getting 100 cents on the dollar.
2) Secured bonds will say that… and they will specify which asset they are secured against… They come with a lien… No lien, no secured debt
3) Secured bond are rarely issued to individual investors and are almost always issued in LARGE amounts. AKA 100’s of millions/Billions
4) Secured GM bonds are still worth 100 cents on the dollar… There are still more then enough GM assets to pay off all of there secured debt. If they were secured they wouldn’t be complaining.

While Ronnie is right, the Bond holders did not ask for Bush to bail out GM, what he fails to understand is that is nature of holding unsecured Bond you have almost no say in the running of the company. PERIOD. You can’t just buy a bond and turn your brain off (which is what Ma and Pa Kettle here did) It is clear that they had no clue what they bought, no clue what rights they have (or don’t have) and no clue what could go wrong.

When you hold GM paper you need to watch what is going on just like holding GM stock.

GM bonds have been down graded several time since they bought these bonds… were they paying attention? Nope.. If they were worried about security they should have dumped them at any time they saw the bonds get “de-statused” what did they think the bond ratings meant?

Investors like these should be buying simple term deposits or treasury bills…

While I feel sorry for them, that’s how investing works! There’s risk, DUH!

People who got shafted by Enron have the real sob stories because they didn’t know their company was engaged in illegal activities. GM, on the other hand, didn’t do anything illegal; they were just unsuccessful–there’s the risk.

The proper use of the term “Marxism” is to describe a specific political ideology, namely one that sees all the problems of history in terms of a class struggle, and one that sees the solution to these problems by violent revolution of the working classes.

Who says it has to be a violent revolution? Most leftists/progressives/Marxists in the United States are gramscians. Gramsci felt that violent revolution would never happen so he advocated the “long march through the institutions”. Much of Gramsci’s agenda has been achieved, with many cultural institutions and the academic world firmly in the leftist camp today. Obama is a product of a gramscian strategy and alinskyite tactics.

Pro tip: to make people who make statements like this look dumb, just ask them what specifically they would’ve changed about the deal and why.

The St. Pierres already said that this is the best deal they’ll probably get. They are more concerned about being left out of the loop and not being represented in the process than anything else, it seems to me.

Still, the Obama PTFOA is clearly trying to avoid the bankruptcy courts not because they don’t want Chrysler and GM to go bankrupt but rather because they don’t want to abide by the rule of law. No matter who appoints them, judges don’t like to be reversed on appeal and they are more likely to be impartial than Obama.

I would have done what Chrysler’s secured creditors did and taken my chances with a bankruptcy judge. While it’s true that in bankruptcies the larger creditors negotiate for all, in this case the larger creditors have a huge conflict of interest because they’ve all taken TARP funds and don’t want to upset Obama, so the smaller institutional non-TARP recipient creditors have a point.

The issue is not a cramdown. The issue is a forced cramdown by the US Gov’t so that it can convert its own loans to private enterprises into equity positions and push more senior creditors down the list, while it takes over the company with its UAW partner. Even when a bank acts as a lender of last resort or when it provides DIP financing cannot cut in front of senior secured creditors when it comes to splitting up assets or equity.

The US Gov’t cannot take cuts in line to get ahead of senior creditors. You say this is not “hardly all that unusual.” The gov’t is trying to rewrite bankruptcy law on the fly to its own benefit and to the detriment of senior creditors. Those senior creditors have much more money at risk than the federal government yet it’s the gov’t that’s demanding a large chunk, deigning to let the secured creditors keep 10%.

Like Mr. St. Pierre said, who’s going to risk putting money into a company if the government is going to tear up contracts?

While a bankruptcy judge might indeed place the needs of some unsecured creditors (like the UAW’s VEBA) ahead of the needs of some senior unsecured creditors (in order to keep the company running during Ch 11), that’s up to a judge’s judgment and the law, not up to a president whose party has received millions in campaign contributions from those unsecured creditors.

Who gets to determine what is venture and what is vulture? Business ain’t beanbag. You can’t rewrite the rules in the middle of the game.

I don’t have a problem with people who recognize intellectual property that is not being exploited fully seizing an opportunity. I don’t see what’s morally wrong about making an investment based on the fact that profit might be made in a bankruptcy.

I’m 100% sure that if you were the one holding the secured debt in Chrysler and the government was trying to usurp your property rights, you’d have a different view on the subject.

The issue is a forced cramdown by the US Gov’t so that it can convert its own loans to private enterprises into equity positions and push more senior creditors down the list, while it takes over the company with its UAW partner.

That is just inaccurate, on pretty much every count.

You don’t follow the bad/ good company concept at all. The UAW is going to walk away from what it owed to it from the Bad Company, which is the original GM. That leaves more money for your bad investors like the ones discussed in this article, because there are fewer people fighting over it.

The UAW is not getting equity in the old company. They are being giving equity in a new company in order to induce them to abandon their claims against the old company, which again, leaves more money for the bad investors such as those described in this article.

A similar thing is happening for the government. The government is effectively losing the money that it previously lent to GM by taking equity in the new firm. (By the way, when some of us snarkily pointed out that these were grants, not loans, this is what we were talking about. We’re getting the shaft here.)

If you’re going to be critical, you should at least follow what is happening here. Your precious bondholders are benefiting from the government action. Had the government not induced the union to take ownership **in an entirely different company to which your bondholders made no loan**, the union would be in the old company, fighting with the bondholders over the scraps in a liquidation.

Your people would be getting even less had the government intervened. If it wasn’t for the economic crisis, we would have let you fail, and they would be getting zip. Blaming the government is a copout, and just part of usual dance of avoiding personal responsibility that destroyed GM in the first place.

Who says it has to be a violent revolution? Most leftists/progressives/Marxists in the United States are gramscians. Gramsci felt that violent revolution would never happen so he advocated the “long march through the institutions”. Much of Gramsci’s agenda has been achieved, with many cultural institutions and the academic world firmly in the leftist camp today. Obama is a product of a gramscian strategy and alinskyite tactics.

If the revolution ain’t violent, then it ain’t Marxist. (It may be one of the near infinite flavors of socialism, true, like British Fabian socialism, but the Marxists I’ve spoken to are very specific about nature of of the revolution.)

Still Ronnie, I have to object very strongly to what you wrote. You make the same mistake the other guy did: you conflate any position to the left of you (which for all I know is to the left of Mussolini) with being the same as revolutionary Marxism, like the instant somebody starts to think Universal Health Care is a good idea they get a invitation in the mail to the global communist conspiracy. Not only is that wrong, it is paranoid in the extreme, something I’d expect from some hysterical Bircher. I’ve met socialists who think exactly the same way you do with the polarity reversed: they think I’m already trying on the jackboots of fascism because I say things like “the market has done good things,” and “I like cars.”

The reasons why this sort of thinking is objectionable are many, but I think I’ll restrict myself to two. First, it divides the world into a duality with two poles, where one pole is everything that is good, and the other is everything that is bad. This is bad not only due to the distortions it creates in your perspective (see remark about paranoia) but it also makes the kind of reasoned debate the founding fathers thought would inform democracy impossible. Think about it: why would you listen to the arguments of others if everything you know is directed toward the good? No only would those people always be wrong, they would in fact be agents of evil. The discourse of reason was supposed to be informed by logic and empirical facts, not slavish devotion to ideological poles.

The other reason, Ronnie, why this sort of thinking is bad is that it does not allow honorable men, for as we know, honorable men can differ! If TTAC is to actually take the idea of the truth about cars seriously, then there’s going to have to be a lot of discussion, and more importantly, a lot of argument and differing ideas. In other words, honorable men (and hopefully women!) differing. But with the dualistic worldview, there can be no real disagreement, only enemies of the way. Truth must be the highest value, no matter if it bucks orthodoxy or not, or if it goes against prevailing ideology or not. Hell, valuing ideology over unpleasant facts is how GM and execs got into this mess in the first place.

Anyway, that’s my point. A dualistic worldview has no place in the discussion of truth, since a dualistic worldview inherently distorts.

Good Lord, by the time the Obama-bots are done here, we’ll all know in detail the difference between, Marxism, Leninism, Corporatism, Fabian Socialism, Maoism, Anarcho-Syndicalism, Luxemburgism, Comunitarianism and every other variety of Liberation Theology and Leftism under the sun.

Well, it appears I was right when I said “My guess, however, is that the St. Pierres hold some uncollateralized securities (debentures) which GM has issued in large quantities.” Not that this is terribly important or relevant.

And I agreed the St. Pierres made an awful investment decision. Not that this is terribly important or relevant.

And I concede that the St. Pierres, who have (or more likely, had) $200,000 in life savings, are better off than some. Not that this is terribly important or relevant. (Well, it would be for Marx.)

So let us focus on the heart of Ronnie’s article: are even “Ma and Pa Kettle” (as someone rudely called them) entitled to equal protection under the law, or should political considerations trump due process?

“Ma and Pa Kettle” (as someone rudely called them) entitled to equal protection under the law, or should political considerations trump due process?

Their entitlements have not changed one bit.

They are a small unsecured bond holder… They could have been trumped by just about any one… and they were…

They probably didn’t know that this could happen… it did… doesn’t make what happened illegal… and it doesn’t change there protection under the law… They are just as protected today as they were last fall, just before GW Bush bought up a ton of secured GM debt…

This is only an issue because the new kid on the block is the federal government… If the credit market wasn’t so F’ed up right now… It would be some big bank…(like at Ford) Same difference, same consequence, same protection.

I’m 100% sure that if you were the one holding the secured debt in Chrysler and the government was trying to usurp your property rights, you’d have a different view on the subject.

Careful Ronnie, you are making stuff up again… No ones property rights at Chrysler are being usurped.

are even “Ma and Pa Kettle” (as someone rudely called them) entitled to equal protection under the law, or should political considerations trump due process?

The article failed to establish that there was any lack of fairness or that political considerations were trumping anything.

Here’s what you miss —

-The government is a secured creditor, so it is superior to the bondholders

-The UAW holds a promissory note for the VEBA, so it is also a creditor (although to put a fine point on it, the convertible nature of their note turns their level of priority into a potential legal problem for them)

The government is a legitimate creditor, just as much as everyone else. If GM didn’t want the loan, they shouldn’t have taken it.

The union is also a legitimate creditor. They’re owed money, under a note. Surely you aren’t suggesting that we should ignore a promissory note that they hold, signed by the corporation?

As it stands, the union has expressed its willingness to walk away from the note in exchange for ownership of an entirely different business. This should make the existing creditors of the dying old company happy, because there is now one less party to split up the remains.

You really think that the bondholders would be better off if the union was still standing in line with them? That does not compute.

You really think that the bondholders would be better off if the union was still standing in line with them? That does not compute.

AMEN! None of this computes…
The St. Pierres were secured bond holder, except they weren’t…
Their rights were usurped, except they aren’t…
This is Obama’s fault, except GW Bush/Paulson signed the loans…
They are in the dark, except the down grading of GM bonds was reported on regularly, by everyone…
The rules of the game have changed, except they haven’t…

Now we are saying that Chrysler Bond holders rights are under attack… Last time I checked these very Bond holders FORCED Chrysler into Ch11 and by all accounts they still hold most, if not all of the cards.

The government hasn’t taken anything from anybody, yet, because we’re still in the out-of-court negotiation phase. The government, the union and GM can propose a plan under which existing stockholders get 1% of the new enterprise, existing bondholders get 10%, and the UAW and government get the rest. That’s not against any rule of law. Anyone can propose anything out of court.

And you know what? If the proposal isn’t good, if the government or the union is really trying to get more than they deserve under the law of bankruptcy, then the bondholders can withhold consent and drag this thing into court. It happens all the time. A trip to court is what just happened in the case of Chrysler, for just the same reasons: The government, company and union came up with a plan, a significant minority of bondholders thought they were asking for too much, and now it’s before a judge. We’ll see how that works out. For the moment, the system is working.

And I don’t blame GM and the government and the union for trying to reach an out-of-court settlement. A workout is usually faster and cheaper than dragging it out in court with all the lawyers on the clock, and less damaging to the brand and public perceptions. There is positive value to be gained if it can be accomplished, so its worth trying. But nobody is supposed to lose any rights in a workout that they don’t give up voluntarily, and there is no indication that people are being stripped of anything against their will. If anything, the institutional bondholders, who are dependent on TARP, are being strongarmed into “voluntarily” taking a bath on their CarCo bonds in order to keep the bank bailout bucks coming (as others have surmised).

There is something, though, to the point that large players have the deep pockets and incentives to bring a lot more sophistication and informating-processing power to the table. The small guy can’t match that, and has a harder time knowing if the offer is fair, and has less leverage to make a counteroffer heard.

But you know what? In the grand capitalist tradition, we’ve outsourced the job of representing the small guy to the private sector: That’s what Vanguard, Fidelity, PIMCO and all the rest are for. The fund managers at such places have the time, money, expertise, incentive and obligation to figure out if an exchange offer is a good one, and enough voice (especially when you get a half-dozen of them together) to make a counter-offer heard. You give up this protection (and the diversification of a fund) at your own risk. The couple in the article here were very poorly advised. If there was a law of malpractice for investment advisors, they’d have a good case against their broker. But that’s about it.

Two finer points to put on the discussion of bankruptcy law:

1. Certain forms of creditor “line jumping” are perfectly legal under existing law. Perhaps the most important example is when a person or company takes out a secured loan when he/it already owes money to unsecured creditors. The secured creditor is ahead of the unsecured creditors, at least regarding his ability to collect against the mortgaged asset, notwithstanding the fact he was later in time.

Imagine a person has outstanding student loans or a credit card balance and then one day buys a house, taking out a mortgage in the process. Or a person already owns a house free-and-clear, runs up a few grand in credit card bills, and then takes out a home equity line of credit. Then that person goes bankrupt. The mortgage lender gets first crack at the real estate, even though he was later in time than the student lender or credit card issuer. In corporate settings, some unsecured loans / bond indentures contain a “negative pledge,” under which the borrower promises not to take out any new secured loans while the unsecured obligation is outstanding. But it’s not obtained in all cases, and even when it is obtained, the law in many countries limits the ability of such a clause to actually disrupt the traditional loan priorities.

If the government stepped in as a secured lender at a point late in time, it has plenty of legitimate authority to queue-jump the unsecured creditors — and so would a private secured lender, if there was one. Ford actually mortgaged virtually all of its assets when it took out some massive bank loans a few years back as part of its turnaround plan, and those banks would have priority over the older bondholders if Ford went to court for bankruptcy. If the government, as lender, did the same thing with GM just now — well, good for the Treasury. If the bond indenture allows management to put the assets in hock like that, well, that’s a risk you assumed when you bought the bonds.

2. The Trust Indenture Act if 1939 make the U.S. one of the more protective jurisdictions for bondholders, particularly small-scale bondholders. In many countries, a majority or super-majority (details differ) of bondholders can bind the whole class, by voting or tendering their bonds in an exchange offer. If this were Europe, GM could make an exchange offer which said that when 90% of bondholders tendered, then all bondholders would be bound by the exchange, even the dissenters.

But in the U.S., no bondholder can be bound by the decisions of the other bondholders to accept lower payments or equity in lieu of cash, even if the indenture agreement purports to create such power. Thus, small holders have a choice — they can accept the exchange offer, or hold out, watch 90% of the bondholders walk away with equity in the new enterprise, and then the 10% rump can go to court and fight it out with the other creditors for a cash settlement. They can argue over who gets how many slices of the pie, and/or argue that the pie (the value deposited in the old corporate shell in exchange for putting the working business into the new corporate shell) is not big enough, and that the NewCo (and it’s DIP financier) should leave more value behind in the OldCo.

The reason for this, by the way, is that during the original Great Depression there was evidence that big financial houses would buy up or hold bonds in distressed companies in order to vote a bare majority of those bonds in favor of cheap bondholder settlements, which would then leave more value behind in the company to pay off other securities or obligations. Why do that? The bonds were more widely held than the other securities, so when the banks took a haircut on the bonds, they forced mom-and-pop investors to take a haircut too. Meanwhile, when the returns on the other securities turned out richer than otherwise expected, mom and pop were not there to share in the bounty, because those securities were never sold so widely. Spread the losses but concentrate the gains — sound familiar?

-The government is a secured creditor, so it is superior to the bondholders

-The UAW holds a promissory note for the VEBA, so it is also a creditor (although to put a fine point on it, the convertible nature of their note turns their level of priority into a potential legal problem for them)

The government is a legitimate creditor, just as much as everyone else. If GM didn’t want the loan, they shouldn’t have taken it.

The government and UAW are both legitimate creditors. We both agree with that. But the problem is that neither is a secured creditor. They will both receive zero dollar, when liquidation happens and more senior debt creditors are paid in full first.

The claim that the government is a secured creditor is simply a lie.

Secured creditor means that the money is being borrowed with physical asset as collateral. By the time the government stepped in, Chrysler didn’t have any more collateral to put down. If the government were to be a secured creditor, other existing secured creditors would have to agree to let the government have those collateral. But that never happened. And Bush was criticized for not putting the government ahead of everyone else when the first bailout package was granted.

What’s happening right now is the government/UAW confiscating properties of existing secured creditors. No wonder they are trying to befriend Castro at this exact moment.

The government and UAW are both legitimate creditors. We both agree with that. But the problem is that neither is a secured creditor.

Wrong. The government IS a secured creditor. I have provided links to summaries of the loan documents which say as much.

I have no idea where some of you get this idea that that the government loans are not secured, but you are wrong. They are secured, as I have already demonstrated. If this site is going to be about the truth, stop repeating falsehoods, even after you’ve been corrected.

Secured creditor means that the money is being borrowed with physical asset as collateral.

Again, you don’t quite get it. Security is not as narrowly tied to specific collateral as you believe it to be, and you can read the UST loan docs and see that you are incorrect.

There are a lot of mistaken notions posted on this thread, statements that are just factually wrong. It’s one thing to have a hard on against the union, but try to keep your facts straight in the process.

From the sound of things, NBK-Boston is probably a bankruptcy attorney. Take heed of his points, the guy knows what he’s talking about.

Please, enough of this “broker” bashing. Brokers by definition can recommend any bonds, and by the way, there’s no money in it for the broker. To assume this was a “sale” is wrong. The family must bear some responsibility. This went terribly wrong but no one person or firm is to blame. It was a perfect storm that led to this issue and it’s time for them to take their medicine and move on.